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Fair-Value Accounting for Federal Credit Programs

Federal credit assistance supports such private activities as home ownership, postsecondary education, and certain commercial ventures. Excluding the activities of Fannie Mae and Freddie Mac, at the end of fiscal year 2011, about $2.7 trillion was outstanding in federal direct loans and loan guarantees.

CBO examines fair-value accounting as an alternative to the current approach for measuring the costs to the government of federal credit programs.

FCRA Treatment Does Not Give a Comprehensive Accounting of Federal Costs

The Federal Credit Reform Act of 1990 (FCRA) requires the costs of credit assistance to be measured by discounting—using rates on U.S. Treasury securities—expected future cash flows associated with a loan or loan guarantee to a present value at the time of disbursement.

In CBO’s view, FCRA-based cost estimates do not provide a full accounting of what federal credit programs actually cost the government because they do not incorporate the full cost of the risk associated with the loans.

Fair-Value Accounting Provides a More Comprehensive Measure of Federal Costs

Fair-value accounting recognizes market risk—the component of financial risk that remains even after investors have diversified their portfolios as much as possible, and that arises from shifts in current and expected macroeconomic conditions—as a cost to the government. To incorporate the cost of such risk, fair-value accounting calculates present values using market-based discount rates. Thus, fair-value estimates often imply larger costs to the government for issuing or guaranteeing a loan than do FCRA-based estimates.

Using FCRA-based estimates instead of fair-value estimates has important consequences for the way policymakers might perceive the cost of credit assistance:

The costs reported in the budget are generally lower than the costs to even the most efficient private financial institutions for providing credit on the same terms;

The budgetary costs are almost always lower than those of other federal spending that imposes equivalent true costs on taxpayers; and

Purchases of loans at market prices appear to make money for the government and, conversely, sales of loans at market prices appear to result in losses.

Fair-Value Accounting Has Challenges

Government agencies would incur training expenses and the cost of developing new valuation models.

Fair-value cost estimates would be somewhat more volatile, although factors that also affect FCRA estimates would continue to be the main cause of volatility.

Fair-value estimating would require analysts to make additional judgments that could introduce inconsistencies in how costs of different programs are evaluated.